Navigating Valuation and Financing Strategies for Entrepreneurs
This guide delves into the complexities of valuation and financing in entrepreneurship, emphasizing the importance of recognizing opportunities and managing uncertainty. It covers key concepts like capital efficiency, the effects of dilutive equity financing, and how to assess post-money vs. pre-money valuations effectively. Entrepreneurs are encouraged to grow without external financing whenever possible, maximizing ownership and reducing pressure for exits. The document also highlights the significance of cap tables in tracking ownership stakes and implied valuations, aiding in informed decision-making.
Navigating Valuation and Financing Strategies for Entrepreneurs
E N D
Presentation Transcript
So Far… • Recognizing and assessing opportunity • Pocd • Business models • E’ship – A process view • Financing The Venture • Managing uncertainty
If You Can Grow w/out External Financing… • You are much better off…no dilution, no outside investors to manage, no gun to your head on an “exit” • Requires: A business w/ low equity capital requirements • Highly capital efficient • Significant debt availability
If You Do Raise Outside Equity… • The higher the “inherent rate of return” on equity… • The higher the proportion of equity the entrepreneur(s) will be able to hold on to
Investors Generally Back Into A Valuation, Don’t Start There • What is my best guess about terminal value and exit time • What is my best guess about future funding requirements and resultant dilution • What is the most I can afford to pay now i.e., what is the smallest % ownership I can walk away w/ and still get my required return
Valuation • Implied or Implicit or Imputed Valuation is Different than “Calculated (NPV) Valuation” • Have you ever bought a share of stock? • Did you calculate the NPV of the firm’s cash flows? • I can still do the math: $/% = Implicit Valuation
Valuation (2) • We have generally done AFTER the fact as a way of calibrating progress, or lack thereof • Our simple model is admittedly flawed – doesn’t account for much but simple “common %” i.e., by dividing by % ownership we are ignoring any preference in return
Pre And Post Money Valuations • The amount of money invested and the % bought determine a “Post Money” valuation e.g., the business is worth $__ after I put my money in • Example: If I buy 20% for $1 million the 100% must be worth $5 million • So, “before my money went in” it must have been worth $4 mil ($5 -$1)
The Simple Math • Post-money – new money in = Pre-money • Pre-money + new money in = Post-money
The MOST You Will Pay Is Not What You Hope To Pay • The resulting valuation is a function of negotiation influenced by • competition for the deal / entrepreneur’s alternatives • Investors’ appetites, experiences, specific knowledge
Cap Tables • Show the ownership stakes over time • Across multiple “rounds” of financing • Allow computation of implied valuation of the company and implied valuation of each owner’s shares over time
Goood decisions come fromhaving good alternatives from among which to choose The Lesson:
